Islamic Finance Regains Momentum

Platt, Gordon, Global Finance

Sukuk issuance is rebounding as investor confidence returns to the GCC region.

The global financial crisis has accelerated what already was a growing interest in Islamic finance and has created new opportunities for Islamic financial insti- tutions as a result of problems in the conventional banking system, bankers say. "The financial crisis is creating opportunities from two sides," says Emad Al-Menaie, chairman and managing director of Liquidity Management House, which is owned by Kuwait Finance House. "First, there is an ongoing return to basics in financial ar- rangements, with demand for transactions backed with the appropriate assets, which is a hallmark of Islamic finance," he says. "Bankers are looking more closely into the operating side of the businesses they finance and the capacity of their customers to produce the right revenues for a particular financial obligation," Al-Menaie explains. "Second, investors are attracted to Islamic financial instruments because of their income-generating ability and capita] appreciation," he says.

Kuwait Finance House, the largest Islamic lender in Kuwait, established Liquidity Management House in January 20(18 to issue, purchase and trade sukuk, equivalent to Islamic bonds, with the goal of creating a global secondary market. "The recent issuance of sovereign sukuk issues by Bahrain and Indonesia as well as the introduction of new global investment funds show that the market for sukuk is capturing momentum again," Al-Menaie says.'LThe more players there are, the more opportunities there are for trading," he adds.

European Finance House, the London-based affiliate of Qatar Islamic Bank, announced the launch of its open-ended Global Sukuk Plus fund in May.The dollar-based fund is actively managed and offers weekly liquidity. "The sukuk market is now a global phenomenon," says Mark Watts, head of asset management at European Finance House. "The global sukuk fund allows investors to tap into returns and profits not previously available, as the scale and diversification of investment have increased," he explains.

The fund is predominantly invested in sukuk, comprising sovereign, quasisovereign and corporate issuers. Value could be added through investment in shariah-compliant debt or credit investments, such as syndicated murabahah (a form of cost-plus-fee financing), trade finance and structured investments.

Islamic financial institutions have weathered the global financial crisis reasonably well, says Ala'a Al-Yousuf, London-based chief economist at Gulf Finance House. The vast majority of shariah-compliant institutions have been conducting their business in a conservative manner, and they avoided credit derivatives and other complex structured assets that turned toxic for conventional banks, Al-Yousuf says. "Islamic principles require the structuring of financing facilities as profit-sharing agreements," he notes. "As a result, the lender needs to fully understand the business of its customers," he says.

Bankers in general need to relearn a lot of lessons about sound banking that they may have forgotten, according to Al-Yousuf. "They need to go back to basic tenets of finance and not forget the fundamentals of credit analysis and knowing your customer," he says.

Avoiding Smoke and Mirrors

"The explosion of credit default swaps and similar slice-and-dice credit techniques in conventional banking was a smoke-and-mirrors charade that undermined the Basel capital-adequacy requirements because there was no link to the ultimate lender," Al- Yousuf says.

Bahrain, with its strong regulatory regime, has emerged as the global capital of Islamic finance, according to Al- Yousuf. "Bahrain has the largest concentration of Islamic financial institutions in the Middle East," he says. Bahrain's sale of a sovereign $750 million five-year sukuk in June, which was increased from an originally planned $500 million, attracted strong demand from investors. …

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